Can someone buying latest floor tiles for his home in a remote village influence profits and revenues of a city gas distribution (CGD) company which he has not even heard of? It can, in case of Gujarat Gas, India's largest GGD company and one of the most profitable public sector undertakings. Actually, that is one of the reasons for Gujarat Gas Managing Director Sanjeev Kumar winning the BT's Best CEO award in the oil and gas category, overtaking other two finalists in the sector, Reliance Industries' Mukesh Ambani and E.S. Ranganathan of Indraprastha Gas.
Ranked overall second after HDFC in Best CEO rankings, Gujarat Gas reported Rs 10,384 crore income in FY20 with three-year compound annual growth rate (CAGR) of 26.59 per cent. Its profit after tax was Rs 1,193.32 crore with three-year CAGR of 75.84 per cent.
The company has managed to grow in recent quarters, despite the industrial slowdown and Covid-19 disruptions, mainly due to robust demand from industrial customers, especially in Gujarat's Morbi and its surrounding industrial belt. Further, LNG prices crashed from $6 per Metric Million British Thermal Unit (mmBtu) in 2019 to below $3 per mmBtu this year due to global surplus, increasing margins of gas companies.
Bur the real game changer has been Morbi. On March 10, 2019, the National Green Tribunal ordered all ceramic units in Morbi using coal gasifiers to either shut down or shift to natural gas. Though coal is 30 per cent cheaper, gas solves ash disposal issues and improves product quality due to consistent heat in contrast to coal, which has variable calorific value. Further, in September, the Gujarat government announced a 16 per cent discount on gas bills for ceramic units using gas. GGL laid a pipeline and debottlenecked capacities to enable ceramic units in the area to switch to piped natural gas immediately. Demand from Morbi has risen since then and volumes more than doubled from 2.5 mmscmd (million standard cubic feet per day, the unit of measurement for gas) earlier to 6.3 mmscmd in the last quarter of FY20. The 900-plus tile manufacturers of Morbi are now part of the 4,000-plus industrial customers of Gujarat Gas, the only gas authorised supplier in the area. Now, Morbi tile manufacturers account for 75 per cent industrial volume for the company. More units from the nearby Aniyari cluster are also becoming customers of Gujarat Gas.
Banking on Backbone
But if you ask Sanjeev Kumar, he will say Morbi is just one of the many factors that have been contributing to the growth of Gujarat Gas. The others are sustained and futuristic investment and business expansion strategies and the vision of Narendra Modi, who wanted to make Gujarat the gas hub of the country when he was Gujarat chief minister. "Over the years, Gujarat has created big gas distribution infrastructure - 32 per cent of gas is consumed here, 28 per cent of national gas pipelines are here and 65 per cent gas regasification facilities are here. We are leveraging this backbone network and that is our advantage," he says.
If the flagship Gujarat State Petroleum Corporation (GSPC) is into LNG sourcing production and distribution, Gujarat State Petronet Ltd (GSPL) is the second-largest natural gas infrastructure and transmission company with over 2,700 kilometres of trunk pipelines transporting over 40 mmscmd of gas. Further, GSPL India Gasnet Ltd, a Special Purpose Vehicle promoted by GSPL along with oil marketing companies, is building an over 1,600 km cross-country pipeline from Mehsana to Bathinda.
Gujarat Gas has over 25,000 km of pipeline network, operates 450 CNG stations and distributes over 10 mmscmd natural gas to over 1.5 million households (the largest in the country) and powers over two lakh CNG vehicles every day, apart from 4,000 industrial units and over 12,000 commercial establishments. It has 24 per cent, 41 per cent and 36 per cent market share of domestic, commercial and industrial gas connections, respectively, says a recent HDFC Securities analysis. As on FY20, the industrial segment accounted for 77 per cent sales, followed by CNG (16 per cent), PNG domestic (6 per cent) and commercial (1 per cent).
It has aggressively gone beyond Gujarat and Maharashtra in the last two years though strategic bidding to secure geographical areas close to Gujarat State Petroleum Ltd's trunk pipelines. It was awarded 11 geographical areas (GAs) between FY15 and FY17, one GA in the ninth city gas distribution round and six GAs comprising 17 cities in Punjab, Haryana, Madhya Pradesh and Rajasthan in the 10th distribution round in FY19. All the GAs awarded between FY15 and FY17 are fully operational; the new areas could add over 2-2.5 mmscmd to demand over the next three-five years.
"Now we have 47 cities and towns across six states and union territory of Dadra Nagar Haveli," says 51-year-old Sanjeev Kumar, a Gujarat cadre IAS officer, who is also the joint managing director of GSPL. "It is not fair to call us only a city gas distributor because we also cater to more than 1,000 small and tribal villages as part of our social commitments," says Kumar, a B. Tech (Hons.) from IIT Kharagpur and a Masters in Public Affairs from Humphrey School of Public Affairs, University of Minnesota, USA. "Gujarat Gas can see a major volume boost of 10 per cent CAGR over the medium term on highest volume base among peers. At the same time, lower input cost can act as a cushion against lower volumes and profitability," says Abdul Karim, a research analyst with HDFC.
British Gas Legacy
The professional approach of Gujarat Gas across the value chain is rooted in its multinational legacy, says Santosh Zope, Head of Corporate Communication & Investor Relations, who has been with the company since its British Gas days. In the mid-1980s, Gujarat Industrial Investment Corporation Ltd (GIIC) had secured natural gas supplies from Oil & Natural Gas Corporation and Gujarat Gas Company Ltd (GGCL) was formed for distribution as a joint venture with the Mafatlal Group. The first CGD project in India was implemented in 1990 with domestic piped gas connection in Ankleshwar, followed by Bharuch, Surat, and then some other towns. In 1991, the company got listed and in 1997, global energy major British Gas (BG) Group picked up 65 per cent of GGCL's shares from the Mafatlal Group.
The government of Gujarat, through GSPC, bought 65 per cent equity in GGCL from the BG group in October 2012 for Rs 2,463.8 crore as part of plans to create gas infrastructure. The completion of the merger between GGCL and GSPC Gas Company Ltd led to formation of Gujarat Gas (GGL) - with over one million customers. Peeush Upadhyay, EVP - HR and Administration, says despite the Covid-19 disruptions, the company was able to ensure seamless supply of gas and uninterrupted operations due to its well-oiled work flow plans and infrastructure. Gujarat Gas is currently producing total gas volumes of 10.50 mmscmd as against the FY20 average sales of 9.44 mmscmd. In the first half of the year ended on September 30, it commercialised 51 new CNG stations and added 30,000 residential customers, despite the pandemic. Investors also have faith in Gujarat Gas with 182 foreign funds holding 9.25 per cent, constituting 37 per cent 'free float, rare among listed state PSUs.
Competition vs Opportunities
India is opening up its gas market and looking to increase the share of gas in the 'energy mix from 7 per cent in 2018 to 15 per cent by 2030. New big corporate players like Adani Gas and Torrent Gas, also based out of Ahmedabad, are aggressively foraying into the sector to tap the opportunity. But officials of Gujarat Gas don't see that as a big threat. "CGD business is regulated by the Petroleum and Natural Gas Regulatory Board (PNGRB). We have long-term contracts and spot LNG purchasing mechanisms, most of our licences are valid for 25 years and we have huge infrastructure," says Sanjeev Kumar. The PNGRB will soon bid out 44 new geographical areas in the upcoming 11th round of auctions. Further, Gujarat Gas is looking to acquire more licenced areas and planning to invest Rs 5,000-6,000 crore in the next five years. "Our net debt is less than Rs 1,000 crore. We have adequate cash flows with enough room to fund expansion plans," says Nitesh Bhandari, Chief Financial Officer.
The Vasai-Virar region is the next big focus after Thane, where it is expanding network. "Potential volume triggers include a potential ban on use of furnace oil, petcoke and/or any steps to address high pollution levels in select industrial clusters. The post-lockdown volume recovery for the company has also been well ahead of its other CGD peers," says a Citi Research analysis.
The company plans to set up 400 CNG stations across India in the next two years even as the government pushes electric vehicles. "We are also setting up electric charging infrastructure along with our CNG stations," says Sanjeev Kumar. It is also planning to tap the opportunity of converting trucksto LNG and is doing a pilot project on retrofitting milk vans with LNG/CNG kits. "Most of the new stations are coming on outskirts and highways, some along with LNG dispensing facilities. This may not only accelerate the roll-out of new CGD networks nationwide, but in the near future, also drive network utilisation and profitability," says a recent Edelweiss report.
Gujarat Gass success story is sure to flow across India from its current stronghold of Western India, say officials.